Mon July 30, 2012

A Portrait Of A Country Awash In 'Red Ink'

David Wessel has received the Pulitzer Prize and is the author of In Fed We Trust.

Jay MallinCrown Publishing

As the federal debt balloons, reducing it would seem more and more pressing. Yet policymakers remain far apart. Debt, deficit and budget rhetoric is often accompanied by numbers cherry-picked to support a particular political view.

But a new book by Wall Street Journal economics writer David Wessel lays out the numbers that both political parties face.

"In the early 1980s, about 10 percent of the federal budget went to Medicare and Medicaid," Wessel tells NPR's Renee Montagne. "Now, it's about a quarter of all spending, and it's on the way to 33 percent of all spending unless something happens to change the trend."

The book is called Red Ink: Inside the High-Stakes Politics of the Federal Budget, and it breaks down the budget in stark terms: how the government spends its money, who pays what in taxes, and why politicians can't reduce a potentially catastrophic debt load.

Wessel tells a story about one politician who didn't pay his taxes: Richard Nixon. Nixon wasn't required to disclose his tax returns as a candidate, but he was embarrassed when they were leaked to the media — revealing that he had paid barely any taxes between 1970 and 1972. "That turned out to be a huge scandal at the time," Wessel says, "and in fact, it was that report that led Richard Nixon to utter his famous words, 'I am not a crook.' "

Nixon ended up having to pay a lot of back taxes, "but that's kind of lost to history, because the Watergate scandal obscured it," he adds.

Tax returns are also an issue for current presidential candidate Mitt Romney, who has been reluctant to release his records. "I think that in the Romney-Obama contest, the question is not only how much did Mitt Romney pay in taxes, but what should the government policy be toward taxing people at the top," Wessel says. He identifies three questions on which the candidates disagree: First, does the U.S. need more tax revenue in order to bring down the deficit? Second, if it gets more tax money, from whom should it come? And third, how much should we rely on the tax code to close the gap between winners and losers in our economy?

"People who made over a million dollars last year got about 12 percent of all the income in the United States, and paid about 18 percent of all the federal taxes," Wessel says. "If you take the famous top 1 percent ... they got 17 percent of the income and they paid 25 percent of the taxes." Politicians and voters disagree on whether that's fair, Wessel adds, but that's a question of political judgment, not numbers.

But what about those who pay no taxes at all? Wessel says 46 percent of households paid no federal income tax at all last year — many of them lower income households that are exempt, people who take advantage of tax breaks offered by the government, and retirees. "A lot of them don't have much money, that's true," Wessel says, "but I think it's also contributed to a kind of sense that they're only taking from the society and not giving to it. ... [It] creates a political problem, it makes them feel like they're outside the system, and it leads to a lot of resentment."

Wessel says he hasn't heard any substantive talk about the budget from either party on the campaign trail. "It's hard to get a consensus, a political consensus for doing what we have to do if people aren't getting straight talk," he says. "It is simply not true that we can solve our deficit problem only by taxing the top tier of people, and it's very unlikely that we can cut spending enough to solve the deficit without raising taxes on pretty much the bulk of the American people."

If he were moderating the campaign debates, Wessel says, he'd ask each candidate for five proposals to combat the deficit. "How much would they do in tax increases? How much would they do in cutting defense spending and so forth," he says. "A budget is a way to put into specifics what your belief system is. So it would be good if we could somehow force the candidates to say, yes, I differ from my opponent, here's my recipe, and then people would know what they would do if they were elected."

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Transcript

RENEE MONTAGNE, HOST:

As the federal debt balloons, it would seem more and more pressing to reduce it.

REPRESENTATIVE PAUL RYAN: On January 1, 2013, there's going to be a massive fiscal cliff of...

SENATOR KENT CONRAD: We live in a very dangerous world, and if we cut defense...

SENATOR JOHN MCCAIN: Their policies brought us to the brink of financial collapse.

BEN BERNANKE: We've got to stop this notion that we can just keep taking more and more and more from families and businesses to spend us deeper into debt.

MONTAGNE: The voices of House Budget Chairman Paul Ryan, Senate Budget Chair Kent Conrad, Senator John McCain and Fed Chair Ben Bernanke. But for all the concern, debt, deficit and budget rhetoric is often accompanied by numbers that are cherry-picked to support a particular political view, which is David Wessel is out with a new book called "Red Ink." In it, the Wall Street Journal economics editor lays out the numbers both political parties face, for example...

DAVID WESSEL: In the early 1980s, about 10 percent of the federal budget went to Medicare and Medicaid. Medicare for the elderly, Medicaid for the poor. Now, it's about a quarter of all spending, and it's on the way to 33 percent of all spending unless something happens to change the trend.

MONTAGNE: The book breaks down the budget in stark terms; how the government spends its money, who pays how much in taxes and why politicians can't reduce a potentially catastrophic debt load. David Wessel joined us, as he often does, this time to talk about "Red Ink." Good morning.

WESSEL: Good morning.

MONTAGNE: In your book, you write about a prominent Republican politician who made headlines for the taxes he did not pay on his wealth, and that would be Richard Nixon, 1973. Tell us that story.

WESSEL: It's an amazing story that I had no knowledge of until I started working on the book. Richard Nixon, who did not have to disclose his tax returns as a candidate was embarrassed when his tax returns were leaked, and there were stories actually in the Wall Street Journal that revealed that in 1970, 1971, and 1972, he had total income of nearly $800,000 and he had just paid $5,000 in combined federal income taxes. And that turned out to be a huge scandal at the time.

A lot of focus on this, and in fact, it was that report that led Richard Nixon to utter his famous words: I am not a crook. What followed that was: I've earned everything I got. That was a response to questions from newspaper reporters and editors about his tax returns, and in the end he had to pay a lot of back taxes. But that's kind of lost to history because the Watergate scandal obscured it.

MONTAGNE: And of course now during this campaign, this has come up with Mitt Romney. The question does not involve anything - anybody suggesting anything illegal, but the question is whether the tax rate that he pays is unseemly or possibly unfair. I mean, what do you think is the appropriate way to sort of go at this?

WESSEL: Well, I think that in the Romney-Obama contest, the question is not only how much did Mitt Romney pay in taxes, but what should the government policy be towards taxing people at the top? And I think there are basically three questions. One is, do we need more tax revenue in order to get the deficit under control? President Obama says yes, Mitt Romney says no. If we're going to get more tax money, from whom should it come?

President Obama says it should come from people who make more than a quarter-million dollars a year, Mitt Romney disagrees with that. And third, how much should the tax code be used to lean against the widening of the gap between winners and losers in our economy to kind of make the income distribution more fair?

MONTAGNE: Well, let me ask you though, right now, how much do the rich pay in taxes, and for simplicities sake, I'll let you talk about the top tier, people who will be making a million dollars a year, people who seem to have plenty of money.

WESSEL: Right. So people who made over a million dollars last year got about 12 percent of all the income in the United States, and paid about 18 percent of all the federal taxes. If you take the famous top 1 percent, those are people who make roughly $500,000 and up, they got 17 percent of the income and they paid 25 percent of the taxes. Politicians and voters differ on whether that's fair or not. That's not a numbers question, that's a political judgment question. But those are the facts.

MONTAGNE: Of course, there's a lot of talk lately about how so many people don't pay any income tax at all. A lot of people.

WESSEL: Right. Because of all the government policies that run through the tax code, 46 percent of all American households didn't pay any federal income tax last year. Most of those people, about 60 percent of them, did pay the payroll tax, but 40 percent of the people didn't pay either the payroll tax or the income tax on the federal level last year.

MONTAGNE: And that's not just people who are lower income.

WESSEL: It's a lot of people who are lower income. It's a lot of people who take advantage of various tax breaks that the government offers, like the earned income tax credit which gives a cash bonus to low-wage workers, and it's people who are retired and whose only income is basically social security.

MONTAGNE: That's quite a high number of people who do not pay federal income tax.

WESSEL: Right. Many of them do pay the payroll tax. So about a quarter of the population doesn't pay either the payroll tax or the federal income tax. A lot of them don't have much money, that's true, but I think it's also contributed to a kind of sense that they're only taking from the society and not giving to it, and to the extent that so many Americans are not paying anything toward the cost of the federal government creates a political problem.

It makes them feel like they're outside the system, and it leads to a lot of resentment among working people who do pay taxes. So it may be the right thing to do, but it's something that we have to think about more carefully than we have.

MONTAGNE: Getting back to the general subject of the budget, do you hear any serious talk on the campaign trail?

WESSEL: Unfortunately, no. It's kind of disappointing that neither campaign seems willing to explain the facts to people and say we have to make some choices and these are the choices I want to make. It is simply not true that A, we can solve our deficit problem only by taxing the top tier of people, and it's very unlikely that we can cut spending enough to solve the deficit without raising taxes on pretty much the bulk of the American people.

MONTAGNE: If you controlled things, if you were a moderator of a debate between the two candidates, what sorts of things would you try and get from them in that debate?

WESSEL: I would tell them before the debate, look, here's the deficit problem. Let's agree on the dimensions of the deficit problem. I'd like you to give me your recipe - the five things you would do that would actually bring the deficit down to some manageable level over the next ten years, and we could pick what that level is. We could see how much would do they do in tax increases, how much would they do in cutting defense spending, and so forth.

A budget is a way to put into specifics what your belief system is. So, it would be good if we could somehow force the candidates to say, yes, I differ from my opponent, here's my recipe, and then people would know what they would do if they were elected.

MONTAGNE: David, thanks for joining us again.

WESSEL: You're welcome.

MONTAGNE: David Wessel is economist editor of the Wall Street Journal. His new book is called "Red Ink: Inside the High Stakes Politics of the Federal Budget."

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